The Almighty Stock Market Is An Emotional, Idiotic Mess

Friends, I woke up today with one thing in mind: To find out how stock markets began, finally, so I’ll know the basis of these things I hate so very very much.

Turns out the Republic of Venice ca 1350, when it literally made its population fork over the money for its bills. In return, they got pieces of paper.

Thing is, Venice paid handsomely and regularly for almost a century (memory). This, of course, made other city-states and what-have-you follow suit. And so I’d like to thank medieval Venice for ruining the whole fucking world forever. Who builds a goddam city on wooden posts in a fucking lagoon?

…Er… one of the most financially and otherwise successful cities/states in history. And most beautiful… at least until people had to start using their second floors as their first due to flooding.

But what do people expect when they pile tons and tons onto freaking logs in a freaking lagoon?

And now we depart The Most Serene Republic for Wall Street.

The NYSE started in 1792 when a bunch of stock brokers decided to do so. Yeah. That simple. They signed what’s known as the Buttonwood Agreement, so-named because it was signed under such a tree. And that was that. Twenty-four people standing on Wall Street in lower Manhattan saw Pandora’s Box and smashed it open.

I won’t go through its history because it’s boring. Here’s what is not: 588 people were members of the NYSE — that’s it, that’s all — when it went public last decade. Meaning positions people created for themselves ca 1800 made 588 assholes more rich than they were already.

AND SO! “Like” or comment or — do something to make it official — whatever this post. We will form… Include name ideas in comments. Here’s why: Let’s hope at least one of us becomes rich and famous (it’s just a sex video or demeaning reality teevee stint away!). Then our group will be rich and famous, vicariously. Importantly, we will not tell anyone what we do. First, because it would be nothing. Second, because the Masonic lodges are still packing ’em in.

And this is how a stupid little action can mean Big Money You May Already Be A Winner of the Prince of Nigeria!

AHEM. This is what most people who invest as a “job” think: that behind all the numbers and stock symbols, there’s a vast, emergent intelligence. These people believe in the efficient-market hypothesis.

You get your choice of three flavors: Soft EMH, Stop me if you’ve heard this one before: Past performance is not a guarantee of future results. Specifically because the past doesn’t provide enough information to allow anyone to make an informed decision, such that they can “beat the street.” And every investor is equally ignorant and can do no better than any other.

Then there’s semi-strong EMH. The semis believe that The Market prices all public information into a stock, such that the majority of investors cannot gain an advantage over any others.

And of course strong EMH. The strong ones believe all public and private information is priced into a stock, which means a company’s CEO is speculating on his shares as much as a guy who doesn’t know he has a thousand’s worth of the company in a mutual fund.

PLEASE NOTE! I’m not a finance genius. …I think it’s obvious that I hate fucking finance and think it’s the field thieves enter when they want to go pro. With this in mind, know that the above definitions are pretty loose. But they only need to be good enough for this:

Until robots, a person was behind every trade. With them, I’m sure many are designed to follow strategies developed by humans. So — wait. I’ve jumped ahead.

The inherent contradictions in EMH: The flaccid type means no one has ever been tipped off that a merger is a done deal before its inked. It meant Kenny Boy Lay had no idea he was a doucher of a fraud until he was convicted of being one. It means Brooksley Born’s opinions about CDSs were no better than Greenspan’s, though one based her opinion on fact, the other on the economic theories of a shitty novelist (Ayn Rand).

(Really. The last time Greeny was called before Congress he was asked whether the events leading to, causing, and in the recession had caused him to reconsider his Do Not Touch policy regarding Wall Street. And he said that everything he believed about the economy was wrong. I’m unsure if he said that millions of Americans had obviously not acted in rational self-interest on their way to bankruptcy. But I do know that for once in his life he admitted the need to regulate Wall Street. And he seemed a broken, very old man that day.)

The semis, by definition, admit that anyone who has information that is not available to the rest of the public has an advantage.

The strong ones? Sorry, no. Not all info is applied to all stocks at all times through the individually motivated trades made by millions.

And that’s the Big Fail of EMH: The Market isn’t a god our government can or should have faith in, nor offer it the first-fruits of economic stimulus cash (which, I recently learned, involved the government actually signing off on at least some of the finance d-bags’ salaries and bonuses).

The market is a bunch of people who know a bunch of different things who buy some of the same stocks for different goals and who do not read every scrap of information about every position they hold.

And there’s this: No matter what information available, a person isn’t going to think rationally about it. We’re victims to the psychological biases evolution has bred into us, and most people don’t “think” a certain way about something, they “feel” it. And the latter is given more importance.

People see patterns where there are none. Imagine causes for all effects. Like to move as a herd (groupthink, thanks Orwell). Give more importance to more recent events. Believe anything if it’s repeated enough times (see national debt). Believe more strongly when given evidence not to. Learn whatever we want to from whatever we are given. And so on.

I’m sure I needn’t spell out the ways in which these biases affect investment decisions. …Just as I was sure I didn’t need to list all the others.

(What does knowing our biases teach us? That we will never fucking learn.)

And so no, the almighty goddam market is not efficient because humans aren’t. The market also is a manic-depressive, which does not speak well of the investor class.

BUT WHAT’S ALL THIS, THEN? I set upon my research looking for how markets justified themselves. They’ve never been asked to.

And the financial industry that serves the stock markets that are said to both drive and reflect our economy? How could it be too big to fail? The fact is, financial firms are companies just like all others. Let’s say most of them went belly up years ago.

How would your life be different today?

Fuck Wall Street.

–dbm

PS: Let’s suppose, thanks to our pals the RoboTraders, The Market were to become, at last, adherent to the principles of strong EMH. Robots would act instantly to all information they received. What would this mean?

First, I suspect the market-as-robots wouldn’t couple as well with very human corporations. But that’s no fun. Time to go sci-fi. Let’s say a robot’s overriding goal is to make the most money possible. Say it finds more like-minded bots. …The moral ends up being robots would collude like crazy and not get caught. Or perhaps plan on being caught at a planned-for moment. It will have done its best, and could give a fuck about federal time.

Finally, the way to keep making money in the market is for the market to never lose value. Simple as that. So-called profit-taking here and there is well and good, but the most rational thing to do, when able to act only on the market, is to ensure it moves ever-upward.

OH! This too: They’d buy the hell out of some US debt.

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